How collaboration with FinTechs could generate value for private banks

in Financial Services, 25.01.2017

The FinTech revolution offers private banks the unprecedented opportunity to benefit from digital technologies, innovate and transform their business. Banks taking up the challenge of collaboration – with FinTechs as well as other strategic partners – stand a good chance of finding the way forward.

When reading Ian Pollari’s article “Dynamic new partnerships and initiatives are at the heart of the digital future for banks” in the latest edition of Frontiers in Finance, one point struck me as particularly true when considering the Swiss private banking sector. Pollari raises the question whether banks and FinTechs could collaborate together to tackle the “immense challenges” facing today’s banking industry.

The new normal

Indeed, Swiss private banks are no exception and have had their fair share of turbulence. The financial crisis, the end of banking secrecy and the tsunami of new regulations have heavily impacted profitability and challenged business models. Swiss private banks today are clearly standing at a crossroads. Although regulatory-driven change remains a prerequisite to operate, long-term sustainability will come from commercially-driven transformation. Banks are now at an inflection point between these two change drivers with an increasing focus on business development.

Historically, Swiss private banks have relied on a limited number of Unique Selling Points (USPs) with a model close to full integration. Today, facing more complexity and rising costs, banks have to change their approach. We believe that they require a systematic, objective self-assessment followed by a refocus on core strengths and a disaggregation of the value chain for the rest. From this perspective, we consider sustainability can only come when placing clients at the center of this reflection, identifying what services truly add value to them, how these services can be best provided and by whom.

Making an impact

For most banks, this will mean a radical rethinking of their approach to become truly innovative both on the business and operations side. Here, as outlined in the article mentioned above, technology will be key in driving innovation and change. We think the current FinTech revolution could have a significant impact in this regard by offering private banks the chance to leverage new breakthrough technologies and reengineer their businesses in ways that were not possible in the past.

Today, there is an increasing number of digital and non-digital actors in the market that can perform many of the bank’s non-core activities more effectively, in terms of quality, performance and risk management, and/or more efficiently, in terms of speed or cost. Collaboration with such partners will enable banks to best add-value for clients when considering both core- and non-core services.

The development of strategic collaborative partnerships will become increasingly important in the Swiss Private Banking sector. As banks spread their non-core activities across multiple actors, allocating each to the best performer, the result will be the genesis of what we refer to as “ecosystems”. This requires banks to:

  • Adopt a long-term perspective when considering collaboration
  • Distance themselves from the provider/acquirer transaction-type perspective
  • Think holistically

Partnerships based on mutual trust, reinforced by bilateral contracts that benefit all parties, can become a powerful competitive advantage. Dynamics of this kind will be difficult for competitors to replicate; therefore, mitigating “me too” risks from rivals.

Ecosystems in the digital era

However, banks should be aware of how modern ecosystems function. Technology and digitalization can change the dynamics that have been at play in traditional ecosystems familiar to us from the physical world. A virtual environment can alter the basic rules of an ecosystem such as the:

  • Time horizon of partnerships
  • Success factors
  • Way parties behave.

Private banks need to monitor new emerging digital trends and breakthrough technologies in order to detect their possible disruptive impacts on ecosystems and to understand how they will evolve. Indeed, the accelerating, and potentially disruptive effect of new technologies will require banks to adopt a more experimental stance when managing modern ecosystems. Agile adaptation and iteration will be key to fully grasp the potential of rapidly evolving trends and making them available to clients. Methodologies such as Minimum Viable Product (MVP), developed initially in the start-up universe, can be very effective for banking executives in this sense.

Conclusion

By helping banks to develop a sustainable competitive edge over the long run, well thought-out and effectively run ecosystems represent a promising future. In this sense, the FinTech revolution offers private banks the chance to leverage new digital technologies, innovate, and transform their businesses in ways that were not possible in the past. Those banks which are willing to take up the challenge of strategic collaboration – be it in the physical and/or digital space(s) – stand a very good chance, in my opinion, of finding the way forward.

Full publication: Frontiers in Finance 

 

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